Oil's fall takes toll on high-risk bonds, IPOs

Tumbling oil prices that are dragging stock indexes down with them also are hitting two other components of the financial marker - junk bonds and initial public offerings.

Prices for the corporate bonds that have fueled the U.S. shale energy boom are plummeting as oil prices have fallen to the lowest level in more than five years. U.S. benchmark West Texas Intermediate was down $1.90 to $55.91 in Monday trading on the New York Mercantile Exchange. Oil's high price for the year was $107.26 on June 20.

Prices for the U.S. energy sector's high-yield bonds, known as junk bonds because they carry high risk for investors, have dropped 18.9 percent since the end of June to the close of trading Friday - putting the debt instruments on track for their worst returns since the financial crisis of 2008, according to the British bank Barclays.

Most of that decline has occurred in the last 30 days. It's already making it harder for oil companies to tap financial markets to fund more drilling operations.

"In the high-yield space there's a distinct lack of liquidity in the market right now," said Larry Whistler, president and chief investment officer at Nottingham Advisors.

He said investors are getting nervous about collateral damage to other sectors, but said he doubts any fallout will be far-reaching.

Others are less optimistic: The $173 billion in U.S. energy junk bonds have become the biggest portion of the high-yield debt market as the Federal Reserve has kept interest rates low, pushing yield-starved investors toward riskier investments.

Now, as prices for those bonds fall, those investors may begin wondering "what sector would be next," prompting them to avoid or sell off more non-energy bonds, said Phil Flynn, senior market analyst at Price Futures Group in Chicago. "It doesn't take a lot for one sector to affect another," he said.

Prices for the entire spectrum of high-yield U.S. corporate bonds have fallen 7.7 percent since June and are set to perform worse than any year since the U.S. credit crunch six years ago, according to Barclays.

The sharp sell-off comes as a handful of small oil companies are approaching or have exceeded 20 percent yields to attract investors to their debt, analysts with Tudor, Pickering, Holt & Co. said in an investor update Monday. Investors demand higher yields to take on greater risk.

The analysts noted that large operators including Occidental Petroleum and EOG Resources have "fared well with little change to yields."

The drop in oil prices also is giving companies pause about entering public equity markets. Private oil producers and their tool suppliers have postponed several initial public offerings until the first half of 2015, as investors wait for oil prices to find a bottom.

It's difficult for Wall Street to put a value on shares of energy companies making public debuts when prices are wobbling daily and most oil companies have yet to release details on their 2015 spending plans. Ira Green, an investment banker at Simmons & Company International, expects a sizable backlog of public offerings once the uncertainty dissipates.

"We're telling clients to get ready for when the window opens," Green said. "There's too much volatility right now."

Green said about half a dozen oil field services companies and 10 to 15 oil producers recently have registered publicly or confidentially for initial public offerings, though several of those have been put off until next year. That's a sharp decline after a slate of small oil producers, many with assets in West Texas, went public in the first half of the year.

The value of energy-company IPOs dropped to $2.76 billion in the fourth quarter, down 57 percent from the same period last year, while values for consumer and technology companies have risen sharply, according to PricewaterhouseCoopers.

"Companies are taking a pause," said Joe Dunleavy, a Houston capital markets and accounting advisory partner at PwC. "As prices go lower, they'll have to defer longer."